This Article is written by Mehak Jain from Hidayatullah National Law University. This is an exhaustive article that aims to explain the difference in rights of lessor and lessee during COVID-19 and the applicability of the force majeure clause.
Table of Contents
Introduction
The pandemic came at a time when nobody was prepared for it and has created a ruckus ever since its arrival. What started from Wuhan has now taken ahold of the whole world and shows no steps of slowing down. Other than the exceedingly alarming number of lives COVID-19 has taken, economies are shaking and the world is preparing to witness a global recession. Every type of industry and relationship has been hard hit by it, and one such relationship is that of the lessor and lessee.
The dispute arose when the lessees denied paying the rent as per their lease agreements; however, they’re not all wrong since most of them have been unable to get access to their leased property. Others haven’t been earning income due to the lockdown shutting most of the businesses down and making them financially unable to pay rent. The questions which arise are many- is it right to waive off their rent, if so, under what provision? What does Indian law have to say about this issue, and is there a remedy to be availed?
General rights of lessor and lessee
Background
India hasn’t faced such a scenario in history and the pandemic struck the country very hard. Spreading of disease in a country as populous as India would have led to disastrous consequences. As a result, the Prime Minister of the country declared a 21-day lockdown on 25 March 2020. This gave rise to many issues for all sectors, particularly the retail sector. Rent cannot be paid as there is no source of income for the lessors due to businesses being shut because of lockdown and this has led to many arguments.
Now, the main problem at hand is whether the force majeure clause can be invoked or not. But for that, we’ll have to analyze the rights of the lessor and lessee, to then go and see how these have been affected by the pandemic.
Important Definitions
Section 105 of the Transfer of Property Act, 1882 defines Lease, Lessor, and Lessee.
Lease is the transfer of right to enjoy immovable property in exchange for a consideration, for a particular time period for which the transferee has assented to the terms of the agreement.
The transferor is the Lessor and the transferee is the Lessee.
General Rights of Lessor and Lessee
Section 108 deals with the rights of lessor and lessee.
Rights of Lessor:
- Right to recover rent.
- Right to take back property on expiry of agreed time-period as per the lease agreement.
- Right to recover damages in case of damage to property.
- Right to take back the property if any condition of the agreement is breached.
Rights of Lessee:
- If there’s any alteration to the property during the period in which the lease is valid, the alteration shall come under the lease.
- If any material part of property is partially/ wholly destroyed, or rendered substantially and permanently unfit for the purpose for which it was set out on lease, due to floods, fire, tempest, violence of army/mob, or other irresistible force, at the option of the lessee, such a lease agreement shall be deemed to be void. However, the lessee can’t avail this provision if the injury is occasioned by his/her wrongful act or default. (This is the clause we are concerned with as only this clause can be invoked in the event of a pandemic.)
- If the lessor was bound to make some repair and neglects to do the same for a reasonable time after notice, and the lessee repairs and bears some cost, he/she is entitled to recover it from lessor/ deduct the amount from the rent to be paid.
- If lessee has attached something to the property, he/ she is entitled to detach it. However, he/she should leave the property in the state in which it was originally handled.
- When the lease is of an unspecified duration, the lessee or his/her legal representative is entitled to collect benefits from crops sown of such property.
- Lessee has a right to sub-lease/ mortgage.
With reference to how the rights change in the times of a pandemic, we will be dealing with Section 108(e) of the said Act and specifically, the clause “irresistible force” mentioned in it.
Irresistible Force: The force majeure clause
The most common solution to any unanticipated event in contracts is the force majeure clause, which affects the ability of a party to perform the contract in case of an unseen future event, or an event which is out of reasonable control of the party.
Generally speaking, a force majeure event is outside the control of the party to the contract and prevents him/ her from performing their contractual obligations.
It is important to note that the force majeure clause under Section 56 of The Indian Contract Act, 1872 is exclusive of lease deeds. We can refer to the case Raja Dhruv v. Raja Harmohinder Singh, where it was clarified that the claim of Force Majeure will not be applicable to lease agreements. The Supreme Court did this on two grounds. Firstly, it held that lease deeds are governed by the Transfer of Property Act, 1882 and are thus not contractual rights only. Secondly, the Court reasoned that Section 56 of the Indian Contract Act did not apply to concluded contracts.
Hence, since we are dealing with lease agreements, we shall delve into the force majeure clause of the Transfer of Property Act.
Requirements of the Clause
According to Section 108(e) of the Transfer of Property Act, 1952, if any material part of property is partially/ wholly destroyed, or rendered substantially and permanently unfit for the purpose for which it was set out on lease, due to floods, fire, tempest, the violence of army/mob, or other irresistible force, at the option of the lessee, such a lease agreement shall be deemed to be void.
The important part to focus on here is “irresistible force”- which is the Force Majeure of this Act. Yes, there is no judicial pronouncement setting out what the irresistible force is, however certain obiters depict the irresistible force and the Force Majeure to be the same.
This subclause, on clear reading, specifies the fulfillment of three criteria to invoke any benefit:
- Property should be rendered substantially and permanently unfit;
- There should be the presence of an irresistible force;
- The lessor must be informed of the lessee’s decision to render the lease deed invalid.
Questions and Problems in invoking it
Now, the questions which arise are:
- Whether COVID-19 can be considered as an irresistible force;
- Whether the property has been deemed substantially and permanently fit due to the virus.
The difficulty shall arise when the pandemic is to prove the property to be “permanently unfit”.
Whether the outbreak of COVID-19 and the lockdown constitute a force majeure event depends on the specific wording of the clause. For that to be determined, the following issues shall be looked into-
- Proof of causation
A causal relation between failure to pay rent and that being due to COVID-19 needs to be established first. For this, the party claiming benefit shall need to prove that he/she would’ve been able to pay rent had it not been due to the virus, and then prove that the virus alone was sufficient to lead to non-payment of rent.
- Readability with other provisions
Since Force Majure is a contractual obligation, it should be readable with other provisions of the agreement. What this means is, the clause must not clash with other provisions or render them useless.
- Abiding by the force majeure clause
The conditions and pre-requisites mentioned in the clause, if mentioned in the agreement, must be followed. If the clause is invoked, later on, new conditions cannot be imposed. Whatever was pre-decided shall prevail.
Disputes during the Crisis
Effect on Real Estate
The real estate industry is experiencing aftershock effects due to the lockdown. So far, the sectors which have been hit hardest are hotels, resorts, inns, bars etc.. Retail and housing haven’t been spared either. Small restaurants and pop-up businesses are more likely to feel a big impact.
Landlords which had given leases for rent are now preparing to deal with tenants who have no source of income and are struggling to pay rent. Impact on retail is huge too. Restaurants and malls are not able to generate even close to what they could generate earlier, which leads to a ripple effect in the economy as lessors brace themselves for requests of condoning or leniency in rent.
Many real estate deals have also been stalled as a result of the virus and lessees are closely assessing the force majeure clause in their agreements and trying to invoke them to protect themselves from paying rent when the space leased wasn’t even accessible to them.
The virus has also made closings more complex. It has been the reason for the delay and in some cases, documentation gets affected as the key dates are missed.
Effect on Commercial Retail
The major concern is whether payment obligation shall still subsist, despite the lessees having no access to their leased spaces.
Well known chains such as PVR are having problems with their lease agreements. Malls have been closed shut even before the lockdown and they have had no access to their leased spaces all the while. Since most of the space and outlets they own are on leased agreements, they’re facing tremendous problems and the company has hence informed their landlords and mall owners that they would not be paying rent for the entire period of shutdown across the country and that they will be invoking the Force Majeure clause in its rental contract.
Reliance Retail may also invoke the clause to escape paying rent due during the lockdown period.
Shoppers Stop also wrote to its landlords refusing to pay rent for three months due to the lockdown.
An international coffee chain with multiple stores in Mumbai also wrote to its landlord about its inability to pay rent due to lockdown.
Rent waived off or Rent Reduction
Most lease agreements don’t contain a rent abatement clause for the lessee’s inability to pay rent. Even if an abatement clause is included, it may be only limited to the loss of service of lessee due to actions of a lessor. Therefore, the lease should be reviewed to identify (if any) the lessee’s abatement rights. Lessee should consider requesting rents to be waived off and lessors should be prepared to embrace this and be more flexible towards it as well.
Solutions to the Dispute
A lessor can invoke the force majeure cause if provided in the lease as the remedy. For a lessor, in case the lessee refuses to pay rent, the lessor shall be entitled to call on back guarantee or cash deposits if mentioned and accorded for in the lease.
A Mumbai-based landlady waived off the rent of two months for her tenants. On a much larger scale, Lodha group, which owns malls in Mumbai waived off rent for retailers occupying its spaces while the lockdown lasted.
An effective, mutually benefitting solution is simple- everyone needs to work together and be flexible. Force majeure clause needs to be reviewed if present. Both parties are being affected and should work out a resolution that is beneficial to both. Payment of rent may be deferred to later or completely be waived off. These are testing times and everyone needs to cooperate.
Conclusion
There are a lot of questions about the force majeure clause and whether it is applicable in the current scenario. These need to be answered and backed by-laws to provide both, the lessor and the lessee some respite. India should look towards New York and New Jersey for example, which have suspended eviction proceedings and other pending orders in light of the disease. The suspension applies to both commercial and real estate dealings and is designed to ensure people engaged in such businesses are worriless. Nobody is free from the clutches from the pandemic. Everyone is undergoing it, and the entire world is together. People should have open minds and should settle petty issues such as rent later. Flexibility is a must and everyone needs to settle down and think about mutual benefit. Cooperation and mutual help is the key to fight the virus.
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